Shanghai As growth in China wanes, Premier
Li Keqiang
has taken the unusual step of a number of measures designed to stop the economy sliding further. In a statement following a cabinet meeting on Wednesday evening, the government said it would accelerate the construction of railways and affordable housing, while continuing with tax breaks for small business. The measures themselves were minor, but the announcement was significant.

By putting out a statement, the government has signalled it won’t allow growth to dip below 7.2 per cent this year. But it has also indicated that it will only be providing limited support to the economy at this stage.

“I don’t think we should call this a stimulus package," said the China ­economist at Capital Economics, Julian Evans-Pritchard.

New approach

This is a very different approach to last year. When growth was lagging in mid-2013, the government made no public statement, while quietly ramping up spending and easing credit conditions. These measures delivered a significant pick-up and the economy finished the year by growing at 7.7 per cent. Such a pick-up should not be expected this year, according to economists who believe the measures are not designed to boost growth, but rather stop it sliding further.

In what was described as an “economic package" by the state media, the government said it would build an additional 1000 kilometres of railway lines this year, an 18 per cent increase from 2013. But these new lines will not be solely funded by the government.

The statement said Yuan300 billion ($55 billion) of private sector investment would be sought, while a further Yuan150 billion in railway bonds would be issued.

This investment will be focused on central and western provinces and there are some suggestions that total railway spending this year could top Yuan700 billion, a record high.

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While these are big numbers they are well shy of the Yuan10 trillion in stimulus which was rolled out after the 2008 global financial crisis.

The other leg to the government’s “package" is accelerating the renovation of rundown urban communities and continuing tax breaks for small business until the end of 2016.

In his annual speech to China’s rubber stamp parliament in March, Premier Li claimed the tax burden on small firms had been reduced by Yuan150 billion and this had seen a 28 per cent increase in private business registrations last year.

Growth slips

“Policymakers don’t want to take the risk of seeing growth slip below 7 per cent this year," said HSBC’s China economist Qu Hongbin.

He expects growth to come in at 7.4 per cent this year, which will be the lowest annual rate since 1990.

And while most economists expect further “fine-tuning measures" to be unveiled during the year, they are split on what monetary policy action may be taken. Any hints on this were noticeably absent from the statement.

This is significant as tighter credit conditions are the main reason growth has slowed so sharply this year.

Mr Qu from HSBC agreed: “monetary policy seems to be playing a secondary role for now and any immediate and aggressive loosening is unlikely".He expects a cut in the reserve ratio requirement –the amount of capital banks are required to keep aside – and said the likelihood of an interest rate cut was increasing.

This view is consistent with government efforts to rein in credit growth and gradually deleverage the economy.

But those who see growth declining faster, believe the government will be forced to act decisively on monetary policy.

“Growth will likely drop below 7 per cent without a pick up in policy easing," said Zhang Zhiwei, the China economist at Nomura.